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I wish western world central banks were as competent. In a situation of sudden supply constraints, prices are supposed to adjust up. This is basic supply and de

I wish western world central banks were as competent. In a situation of sudden supply constraints, prices are supposed to adjust up. This is basic supply and demand. Western world central banks tend to pressure prices down during economic shocks by withholding liquidity. This puts private markets in a gridlock and causes untold amount of damage to people's careers.

samsonradu 7y ago
Liquidity has been anything but withheld in the western world. Look at the G4 balance sheets and interest rates in the past decade.
- BenoitEssiambre 7y ago
  What do you mean? Bernanke himself has estimated that interest rates should have been as low as -4% during the period from 2009 to 2015 (https://www.brookings.edu/blog/ben-bernanke/2015/04/28/the-taylor-rule-a-benchmark-for-monetary-policy/ https://www.brookings.edu/blog/ben-bernanke/2015/04/28/the-t... ). They kept them super high at 0%, up to 4% higher than the equilibrium estimate, which caused inflation to perpetually undershoot and people's careers to be stunted. On top of that, they started giving out interest on reserves which further contracted liquidity. The growth in excess reserves happened because money being made artificially too good at retaining value compared to private assets, caused people, businesses and banks to hoard it. If central banks would have been sufficiently aggressive at giving it out, they would ironically have given out a lot less because people would not have event wanted that much and instead would have continued keeping their savings in better functioning private markets.
  - koheripbal 7y ago
    Negative interest rates have other major problems - that are worse than a liquidity shortage.
    - BenoitEssiambre 7y ago
      For a large part of history, negative real returns on stores of value were the norm. Before financial systems existed, almost all investments had negative returns if you didn’t put work and energy into them. To store value, you had to accumulate stuff, buildings or land. Most options either had high maintenance costs, were subject to risk of damage from natural causes and theft, were very volatile or required hard labor to get production out of. The government creating paper assets that have an above market return, puts a gridlock in the private markets and destroys people's lives.
      - samsonradu 7y ago
        Can you elaborate a little on this? Investments having a negative return does not mean the market (reference) interest rate is negative. Take the gold standard, do you think anyone was able to borrow gold and pay less back? Isn’t that the actual interest rate we are discussing here?
        BenoitEssiambre 7y ago
        The gold standard was a disaster that lead to the great depression, but that was government manipulated gold. Gold in a free market would tend to self adjust. Buying gold as an asset when there is a "flight to safety" and then selling it in better times when there are enough other good assets available such as stocks with good dividends would mean buying gold when gold prices are high and selling it when prices are low thus resulting in negative returns. Negative real returns happen in free markets. Blocking them causes huge problems.
        samsonradu 7y ago
        You’re right, negative real returns definitely happen - but that’s not the interest rate. Interest rates apply to loans, not assets.
        BenoitEssiambre 7y ago
bra4you 7y ago
"I wish western world central banks were as competent." Well... "Western world central banks tend to pressure prices down during economic shocks by withholding liquidity." Well, we have seen gigantic quantitative easing in the US and the EU and also in China. Inflation - I assume that is what you mean by "pressure prices down" - keeps elusive. Japan has tried for decades to create inflation. The only thing that the central banks in the world have managed is to create a gigantic asset bubble, via the so called "asset price inflation". They basically build a cash pipeline to all the asset holders. Make the rich richer and the poor poorer.
- BenoitEssiambre 7y ago
  The poor are much much more hurt by overly tight money. I tried to explain why here: https://medium.com/@b.essiambre/the-world-deserves-a-pay-raise-302f25efd82a?source=friends_link&sk=cb180b2cf186b263b6c6c70ad29bc36e https://medium.com/@b.essiambre/the-world-deserves-a-pay-rai...
  - bra4you 7y ago
    "I tried to explain why here" Well, you failed. Interest rates are historically low. We have seen a gigantic amount of liquidity injected over the last decades. "The poor are much much more hurt by overly tight money." What is the most expensive acquisition in their life for the majority of the people? Real Estate. Prices are through the roof thanks to the central banks. Young people are just getting priced out of the market. Real helicopter money has not been tried yet.
    - BenoitEssiambre 7y ago
      Prices of houses may be high but affordability is not because of cheap financing. Payments could have been made lower with easier money and even cheaper financing. Asset prices are bounded by the cost of producing new houses and also, high house prices create good jobs for house builders.
      - 7y ago

samsonradu 7y ago

Liquidity has been anything but withheld in the western world. Look at the G4 balance sheets and interest rates in the past decade.

BenoitEssiambre 7y ago
What do you mean? Bernanke himself has estimated that interest rates should have been as low as -4% during the period from 2009 to 2015 (https://www.brookings.edu/blog/ben-bernanke/2015/04/28/the-taylor-rule-a-benchmark-for-monetary-policy/ https://www.brookings.edu/blog/ben-bernanke/2015/04/28/the-t... ). They kept them super high at 0%, up to 4% higher than the equilibrium estimate, which caused inflation to perpetually undershoot and people's careers to be stunted. On top of that, they started giving out interest on reserves which further contracted liquidity. The growth in excess reserves happened because money being made artificially too good at retaining value compared to private assets, caused people, businesses and banks to hoard it. If central banks would have been sufficiently aggressive at giving it out, they would ironically have given out a lot less because people would not have event wanted that much and instead would have continued keeping their savings in better functioning private markets.
- koheripbal 7y ago
  Negative interest rates have other major problems - that are worse than a liquidity shortage.
  - BenoitEssiambre 7y ago
    For a large part of history, negative real returns on stores of value were the norm. Before financial systems existed, almost all investments had negative returns if you didn’t put work and energy into them. To store value, you had to accumulate stuff, buildings or land. Most options either had high maintenance costs, were subject to risk of damage from natural causes and theft, were very volatile or required hard labor to get production out of. The government creating paper assets that have an above market return, puts a gridlock in the private markets and destroys people's lives.
    - samsonradu 7y ago
      Can you elaborate a little on this? Investments having a negative return does not mean the market (reference) interest rate is negative. Take the gold standard, do you think anyone was able to borrow gold and pay less back? Isn’t that the actual interest rate we are discussing here?
      - BenoitEssiambre 7y ago
        The gold standard was a disaster that lead to the great depression, but that was government manipulated gold. Gold in a free market would tend to self adjust. Buying gold as an asset when there is a "flight to safety" and then selling it in better times when there are enough other good assets available such as stocks with good dividends would mean buying gold when gold prices are high and selling it when prices are low thus resulting in negative returns. Negative real returns happen in free markets. Blocking them causes huge problems.
        samsonradu 7y ago
        You’re right, negative real returns definitely happen - but that’s not the interest rate. Interest rates apply to loans, not assets.
        BenoitEssiambre 7y ago

bra4you 7y ago

"I wish western world central banks were as competent." Well... "Western world central banks tend to pressure prices down during economic shocks by withholding liquidity." Well, we have seen gigantic quantitative easing in the US and the EU and also in China. Inflation - I assume that is what you mean by "pressure prices down" - keeps elusive. Japan has tried for decades to create inflation. The only thing that the central banks in the world have managed is to create a gigantic asset bubble, via the so called "asset price inflation". They basically build a cash pipeline to all the asset holders. Make the rich richer and the poor poorer.

BenoitEssiambre 7y ago
The poor are much much more hurt by overly tight money. I tried to explain why here: https://medium.com/@b.essiambre/the-world-deserves-a-pay-raise-302f25efd82a?source=friends_link&sk=cb180b2cf186b263b6c6c70ad29bc36e https://medium.com/@b.essiambre/the-world-deserves-a-pay-rai...
- bra4you 7y ago
  "I tried to explain why here" Well, you failed. Interest rates are historically low. We have seen a gigantic amount of liquidity injected over the last decades. "The poor are much much more hurt by overly tight money." What is the most expensive acquisition in their life for the majority of the people? Real Estate. Prices are through the roof thanks to the central banks. Young people are just getting priced out of the market. Real helicopter money has not been tried yet.
  - BenoitEssiambre 7y ago
    Prices of houses may be high but affordability is not because of cheap financing. Payments could have been made lower with easier money and even cheaper financing. Asset prices are bounded by the cost of producing new houses and also, high house prices create good jobs for house builders.
    - 7y ago